Chained CPI? Et Tu, Brute?

Chained C.P.I. (and the fine print taketh away)

In Shakespeare’s Julius Caesar, the surviving political triumvirate finds themselves wondering aloud how “to cut off some charge in legacies.”  Marc Antony and others may have controlled Rome, but they had bills to pay.  Of course, 44 B.C. was a time before actuaries, so most monetary promises to maintain benefits or payments were neatly avoided by using a sharp sword or sweet-tasting poison.  Case in point, you’ll remember their political issues regarding revered leader Julius were answered with some 47 wounds to the body.  They were speedy in 44 B.C. unlike today, but then again not really much different when it comes to eliminating  “some charge in legacies.”  It takes a little longer nowadays, but the effects on earlier promised benefits will often be the same.  And with actuaries, it can even seem logical?

On the state level, especially here in Illinois, legislators in search of money work feverishly to find ways to eliminate or reduce the promises of future cost of living expenses. Historically, COLA’s have always been the hedge against the ravages of inflationary increases on people’s lives, and the Consumer Price Index is what calculates COLA’s.  The Consumer Price Index is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.    The increase is represented in an annual percentage.

Of course, the nature of the “market basket” is and has been important to all of us.  Currently, the basket represents what we would find urban dwellers purchasing, and that “includes all urban consumers, urban wage earners, and clerical workers” (Bureau of Labor Statistics).  This accounts for nearly 87% of Americans.  Non-metropolitan or rural areas are not represented; so for example, increased costs in agricultural machinery would not be found in the “basket.”  On the other hand, fuel to run machinery or automobiles would be.  By the way, this method of calculation is called the CPI-U (Consumer Price Index – Urban). 

But it’s not just what’s in the “basket” that counts.  Another important aspect of the CPI is the math that configures the eventual percentage.  As any budding actuary will remind you, anything – including inflation – can be measured in many different ways.  And herein is the issue.

On the federal level, President Barack Obama has been lately offering the use of a Chained (or hedonic) CPI for calculation of Social Security COLA benefits.  Prior to this executive proposal, social security increases have been figured using the CPI-W (Consumer Price Index – Urban Wage Earners).  The Chained-CPI (or C-CPI) is calculated not on increases to the cost of living but also the spending reactions of those receiving social security to increased costs.  Here are some examples:

My elderly neighbors on social security are making adjustments to the price increases this year for food, for transportation, for electricity, etc.  As a result, they drive less, take no vacations, eat at home with items from the garden, etc. The Chained CPI (C-CPI) takes into account the effects of choosing less expensive or descending life-styles.  Contrasting the CPI-U or the CPI-W, the Chained CPI therefore is much more sluggish in response to increases in prices.  In a logical twist, if you cannot afford it and you choose to purchase something less expensive, then you have adjusted for inflation yourself.  Get it?  It’s the new reality of “less is more.”

According to Dylan Matthews in the Washington Post, “That adds up to a big cut in Social Security benefits.  Imagine, for example, a person born in 1935 who retired at full benefits at age 65 in 2000.  According to the Social Security Administration, people in that position had (benefits of) $23,832 a year.  But under a chained CPI, the sum would be… $22,650 a year.  That’s a cut of over 5%, and more as you go further and further into the future” (http://www.washingtonpost.com/blogs/wonkblog/wp/2012/12/11/everything-you-need-to-know-about-chained-cpi-in-one-post/ ).

In result, Obama’s acceptance of a Chained CPI for Social Security calculations as part of his willingness to deal with the other side – which you’ll remember would have had Social Security in the hands of Wall Street in 2006 – will possibly provide cuts for a program which is unconnected to the budget deficit, remains self-funded through the workers’ wage taxes, and a lifesaver for millions of Americans since 1936. 

“Et Tu, Brute?”